Close to 80 percent of retirees will be without pension income in the future. So they will need financial advisors to help them build their own pensions.
That’s according to “It’s All About Income,” a report released by the Insured Retirement Institute (IRI). The report is IRI’s first study on the American retirement experience.
How will advisors help build pensions for their clients? Through annuities and Social Security claiming optimization, the report said.
Popular finance voices ranging from Suze Orman to Ken Fisher, both of whom disparage annuities, violate the first rule in the book because they lead with product, said Rodney Allain, senior vice president and head of sales for Prudential Annuities.
“These public figures are marketing programs,” he said, but they don’t address specific needs to fill the income gap in retirement.
Advisors simply need to be clear about annuity costs, said financial advisor Julie Casserly. This is because high costs have made people gun-shy about annuities and have made advisors uncomfortable selling them.
Pension income, along with Social Security and savings, make up the pillars of the three-legged retirement income stool. But with the decline in private-sector pensions, Americans need ways to shore up or rebuild the income guarantees provided by that pension leg.
A retired married couple age 65 with income of $50,000 a year would need to invest $485,000 in a life-only annuity to generate $25,008 in annual pension income, the IRI report said. A 65-year-old woman would have to invest $425,000 in a life-only annuity to generate $24,960 in annual pension income, and a 65-year old man would have to invest $395,000 in a life-only annuity to generate $24,948 in annual income, according to the report.
But tens of millions of Americans are expected to reach age 65 with nowhere near the $485,000 a married couple would need to invest to generate $25,008 in annual income, according to retirement statistics.
That leaves two choices for retirees: either taking less income and settling for a lower standard of living, or opting for higher withdrawals from savings and risking outliving their money’s ability to generate an adequate income stream.
Casserly and fellow financial advisor Greg Naples said they sit down for three or four hours with clients to earn their trust before even talking about a product.
Casserly described talking to clients as a “very soulful process,” because it is one in which clients will reveal more than they ever thought possible.
But once the need is identified, she said, then it’s critical to explore a client’s trigger point: How much is a client willing to pay for peace of mind and income guaranteed by the annuity?
“The amount of information that comes out of people is unbelievable,” said Naples, senior vice president of Naples Wealth Management Group.
With the disappearance of defined benefit plans, defined contribution plans will have to pick up the slack. But data show millions of Americans aren’t properly funded to supply themselves with a “paycheck” in a retirement that may last 30 years or more.
Although 401(k) plans held $4.4 trillion in assets on June 30, 2014, the median 401(k) account balance was just $18,127 at the end of 2014, according to an analysis by the Employee Benefit Research Institute.
“The significance of pensions for this group [retirees] cannot be overstated; without them, retirees would have a lower standard of living and/or be far less confident in their ability to sustain their savings in retirement,” the IRI report found.
Generation X and millennials appear more open to financing their basic needs in retirement though an annuity, compared with baby boomers, some of whom have been burned by annuities carrying 20-year expense charges, advisors said. Many annuity products also have changed in the past 30 years, and carriers have done a good job developing a range of annuity products to fit every need.
Zahira Lehri, senior vice president with SunTrust Investment Services, said she uses the “Heather dating parallel” to overcome an objection to using annuities. That parallel states if Heather meets her prospective spouse’s every conceivable requirement except for her name, then use a different name.
“I never use the ‘A’ word,” Lehri said of annuities.
Social Security as a Default Pension Plan
As the pension leg of the retirement income stool wobbles ever more precariously in the face of eroding private-sector defined benefit plans, Social Security appears to have become a de facto pension plan for millions of retirees.
Social Security was designed as a floor to secure a basic level of support for retirees. It was never designed to be a primary source of pension income, yet this is what it has developed into for too many people.
Indeed, Social Security provides between 25 percent and 50 percent of income for 41 percent of retirees, the IRI report found. By comparison, pensions provide between 25 percent and 50 percent of income for only 24 percent of retirees.
Despite 81 percent of current retirees benefiting from pension income, more than six in 10 have filed for their Social Security benefit before age 65, a finding the report calls “a bit stunning.”
Social Security benefits increase 8 percent a year for every year the benefit is delayed. Filing early for Social Security benefits may indicate that a retiree has a shortage of other financial resources.
Retirees have numerous reasons for taking Social Security early. Some retirees may want to begin collecting benefits before they die, while others may not realize that it makes sense to draw on savings in the early years of retirement in order to delay receiving the Social Security benefit.
“In either case, this highlights the opportunity financial professionals have to provide significant value to their clients by incorporating Social Security claim strategizing into the planning process,” the report said.